IFRS 15 Revenue from Contracts with

Customers
By. Vicky Xu
 The ‘five step’ model

Revenue from contracts with customers is recognised based on the

application of a principle-based ‘five step’ model:
 Step 1 – Identify the contract

Contracts, and approval of contracts, can be written, oral or implied

by an entity’s customary business practices.

IFRS 15 requires contracts to have all of the following attributes:

• The contract has been approved
• The rights and payment terms regarding goods and services to
be transferred can be identified
• The contract has commercial substance
 Step 1 – Identify the contract

• It is probable that the consideration will be received

(considering only the customer’s ability and intention to pay)
• If each party to the contract has a unilateral enforceable right to
terminate a wholly unperformed contract without compensating
the other party (or parties), no contract exists under IFRS 15
 Contract modifications

A change in enforceable rights and obligations (i.e. scope and/or

price) is only accounted for as a contract modification if it has been
approved, and creates new or changes existing enforceable rights
and obligations.
Contract modifications

Accounted for as a separate contract if, and only if:

• The contract scope changes due to the addition of distinct goods
or services, and
• The change in contract price reflects the standalone selling price
of the distinct good or service.
Contract modifications
Not accounted for as a separate contract are accounted for as either:
(i) Replacement of the original contract with a new contract (if the
remaining goods or services under the original contract are distinct
from those already transferred to the customer)
A公司与客户签订合同，每周为客户的办公楼提供保洁服务，合同
期限为3年，客户每年向A公司支付服务费10万元（假定该价格反映
了合同开始日该项服务的单独售价）。在第2年年末，合同双方对
合同进行了变更，将第3年的服务费调整为8万元，同时以20万元的
价格将合同期限延长3年（假定该价格不反映合同变更日该3年服务
的单独售价），即每年的服务费为6.67万元，于每年年初支付。
 Contract modifications

(ii) Continuation of the original contract (if the remaining goods or

services under the original contract are not distinct from those
already transferred to the customer, and the performance obligation
is partially satisfied at modification date).
Contract modifications
 Step 2 – Identify the performance obligations

Performance obligations are the contractual promise by an entity, to

transfer to a customer, distinct goods or services, either individually,
in a bundle, or as a series over time.
 Definition of ‘Distinct’

(i) The customer can ‘benefit’ from the good or service

Benefit from the good or service can be through either:
• Use, consumption, or sale (but not as scrap)
• Held in a way to generate economic benefits.
Benefit from the good or service can be either:
• On its own
• Together with other readily available resources (i.e. those which
can be acquired by the customer from the entity or other parties).
 Definition of ‘Distinct’

(ii) The promise to transfer a good or service is separable from

other promises in the contract
A good or service may not be separable from other promised goods
or services in the contract, if:
• There are significant integration services with other promised
goods or services
• It modifies/customises other promised goods or services
• It is highly dependent/interrelated with other promised goods or
services.
2019/3&6 Q4b Zedtech

Zedtech is a software development company which provides data

hosting and other professional services. As part of these services,
Zedtech also securely hosts a range of inventory management
software online which allows businesses to manage inventory from
anywhere in the world. It also sells hardware in certain
circumstances.
 2019/3&6 Q4b Zedtech

Zedtech sells two distinct software packages. The first package,

named 0inventory, gives the customer the option to buy the
hardware, professional services and hosting services as separate and
distinct contracts. Each element of the package can be purchased
without affecting the performance of any other element. Zedtech
regularly sells each service separately and generally does not
integrate the goods and services into a single contract.
 2019/3&6 Q4b Zedtech

With the second package, InventoryX, the hardware is always sold

along with the professional and hosting services and the customer
cannot use the hardware on its own. The hardware is integral to the
delivery of the hosted software. Zedtech delivers the hardware first,
followed by professional services and finally, the hosting services.
However, the professional services can be sold on a stand-alone
basis as this is a distinct service which Zedtech can offer any
customer.
2019/3&6 Q4b Zedtech
Zedtech has decided to sell its services in a new region of the world
which is suffering an economic downturn. The entity expects the
economy to recover and feels that there is scope for significant
growth in future years. Zedtech has entered into an arrangement
with a customer in this region for promised consideration of $3
million. At contract inception, Zedtech feels that it may not be able
to collect the full amount from the customer and estimates that it
may collect 80% of the consideration.
 2019/3&6 Q4b Zedtech

Required:
(i) Discuss the principles in IFRS 15 Revenue from Contracts with
Customers which should be used by Zedtech to determine the
recognition of the above contracts. (5 marks)
(ii) Discuss how the above contracts should be recognised in the
financial statements of Zedtech under IFRS 15. (7 marks)
 2019/3&6 Q4b Zedtech
Suggested answer:
(i) IFRS 15 states that the entity must identify the performance
obligations in the contract. Once an entity has identified the contract
with a customer, it evaluates the contractual terms and its customary
business practices to identify all the promised goods or services
within the contract and determine which of those promised goods or
services will be treated as separate performance obligations.
2019/3&6 Q4b Zedtech

An entity will have to decide whether the obligations are distinct or

part of a series of distinct goods and services which are
substantially the same and have the same pattern of transfer to the
customer. A good or service is distinct if the customer can benefit
from the good or service on its own.
 2019/3&6 Q4b Zedtech
IFRS states that an entity must first identify the contract with the
customer and as part of that identification, the entity has to
determine whether it is probable that the consideration which the
entity is entitled to in exchange for the goods or services will be
collected. An assessment of collectability is included as one of the
criteria for determining whether a contract with a customer exists.
2019/3&6 Q4b Zedtech
(ii) As regards 0inventory, it seems that all of the individual goods
and services in the contract are distinct because the entity regularly
sells each element of the contract separately and is not providing the
significant service of integrating the goods and services. Also, as
the customer could purchase each good and service without
significantly affecting the other goods and services purchased, there
is no dependence upon individual elements of the service. Thus
hardware, professional services and hosting services should each be
accounted for as separate performance obligations.
 2019/3&6 Q4b Zedtech
Regarding InventoryX, the professional services are distinct
because Zedtech frequently sells those services on a stand-alone
basis. However, the hardware is always sold in a combined contract
with the professional and hosting services and the customer cannot
use the hardware on its own. As a result, the hardware is not distinct
and because the hardware is integral to the delivery of the hosted
software, the hardware and hosting services should be accounted for
as one performance obligation while the professional services,
which are distinct, would be a separate performance obligation.
2019/3&6 Q4b Zedtech
When performing the collectability assessment, Zedtech only
considers the customer’s ability and intention to pay the expected
consideration when due. Zedtech has entered into an arrangement
and does not expect to collect the full contractual amount such that
the contract contains an implied price concession. Therefore,
Zedtech needs to assess the collectability of the amount to which it
expects to be entitled, rather than the stated contractual amount.
2019/3&6 Q4b Zedtech
Zedtech assesses whether collectability is probable, whether the
customer has the ability and intent to pay the estimated transaction
price. Zedtech will determine that the amount to which it expects to
be entitled is $2·4 million and performs the collectability
assessment based on that amount, rather than the contractual price
of $3 million.
 Step 3 – Determine the transaction price
The transaction price is the amount of consideration an entity
expects to be entitled to in exchange for transferring the promised
goods or services (not amounts collected on behalf of third parties,
e.g. sales taxes or value added taxes).

The transaction price may be affected by the nature, timing, and

amount of consideration, and includes consideration of significant
financing components, variable components, amounts payable to
the customer (e.g. refunds and rebates), and non-cash amounts.
 Significant financing component
If the timing of payments specified in the contract provides either
the customer or the entity with a significant benefit of financing the
transfer of goods or services.

The transaction price is adjusted to reflect the cash selling price at

the point in time control of the goods or services is transferred.
Significant financing component
A significant financing component can either be explicit or implicit.

Factors to consider include:

• Difference between the consideration and cash selling price
• Combined effect of interest rates and length of time between
transfer of control of the goods or services and payment.
 Significant financing component
FR past exam question:
Hindberg is a car retailer. On 1 April 2014, Hindberg sold a car to
Latterly on the following terms: The selling price of the car was
$25,300. Latterly paid $12,650 (half of the cost) on 1 April 2014
and would pay the remaining $12,650 on 31 March 2016 (two years
after the sale). Hindberg’s cost of capital is 10% per annum.

What is the total amount which Hindberg should credit to profit or

loss in respect of this transaction in the year ended 31 March 2015?
Significant financing component
 2015/12 Q4bi Tang
Tang enters into a contract with a customer to sell an existing
printing machine such that control of the printing machine vests
with the customer in two years’ time. The contract has two payment
options. The customer can pay $240,000 when the contract is signed
or $300,000 in two years’ time when the customer gains control of
the printing machine. The interest rate implicit in the contract is
11·8% in order to adjust for the risk involved in the delay in
payment. However, Tang’s incremental borrowing rate is 5%. The
customer paid $240,000 on 1 December 2014 when the contract
was signed. (4 marks)
 2015/12 Q4bi Tang
Required:
Discuss how the above two contracts should be accounted for under
IFRS 15. (In the case of (b)(i), the discussion should include the
accounting treatment up to 30 November 2016.)
 2015/12 Q4bi Tang
Suggested answer:
The contract contains a significant financing component because of
the length of time between when the customer pays for the asset and
when Tang transfers the asset to the customer, as well as the
prevailing interest rates in the market. A contract with a customer
which has a significant financing component should be separated
into a revenue component (for the notional cash sales price) and a
loan component.
 2015/12 Q4bi Tang
An entity should use the discount rate which would be reflected in a
separate financing transaction between the entity and its customer at
contract inception. The interest rate implicit in the transaction may
be different from the rate to be used to discount the cash flows,
which should be the entity’s incremental borrowing rate. IFRS 15
would therefore dictate that the rate which should be used in
adjusting the promised consideration is 5%, which is the entity’s
incremental borrowing rate, and not 11·8%.
 2015/12 Q4bi Tang
Contract inception - 1 December 2014
Dr Cash $240,000
Cr Contract liability $240,000
During the two years from contract inception until the transfer of
the printing machine, Tang adjusts the amount of consideration and
accretes the contract liability by recognising interest on $240,000 at
5% for two years.
 2015/12 Q4bi Tang
Year to 30 November 2015
Dr Interest expense $12,000
Cr Contract liability $12,000
Contract liability would stand at $252,000 at 30 November 2015.
Year to 30 November 2016
Dr Interest expense $12,600
Cr Contract liability $12,600
Recognition of contract revenue on transfer of printing machine at
30 November 2016 of $264,600 by debiting contract liability and
crediting revenue with this amount.
 Variable consideration
E.g. Discounts, rebates, refunds, credits, concessions, incentives,
performance bonuses, penalties, and contingent payments.

Variable consideration must be estimated using either:

• Expected value method: based on probability weighted
amounts within a range (i.e. for large number of similar
contracts)
• Single most likely amount: the amount within a range that is
most likely to arise (e.g. where the contract has only two
possible outcomes).
 Constraining (limiting) the variable consideration
Variable consideration is only recognised if it is highly probable
that a subsequent change in its estimate would not result in a
significant revenue reversal (i.e. a significant reduction in
cumulative revenue recognised).
 Constraining (limiting) the variable consideration
e.g. A supplies laptops to large businesses. On 1 July 20X8, A
entered into a contract with B, under which B was to purchase
laptops at $500 per unit. The contract states that if B purchases
more than 500 laptops in a year, the price per unit is reduced
retrospectively to $450 per unit. A's year end is 30 June.
 Constraining (limiting) the variable consideration
(i) As at 30 September 20X8, B had bought 70 laptops from A. A
therefore estimated that B's purchases would not exceed 500 in the
year to 30 June 20X9, and B would therefore not be entitled to the
volume discount.

Revenue = 70 * $500 = $35,000

 Constraining (limiting) the variable consideration
(b) During the quarter ended 31 December 20X8, B expanded
rapidly as a result of a substantial acquisition, and purchased an
additional 250 laptops from A. A then estimated that B's purchases
would exceed the threshold for the volume discount in the year to
30 June 20X9.

Revenue = 250 * $450 – 70 * $50 = $109,000

 Consideration payable to the customer
Includes cash paid (or expected to be paid) to the as well as credits
or other items such as coupons and vouchers.

Accounted for as a reduction in the transaction price, unless

payment is in exchange for a good or service received from the
customer in which case no adjustment is made.
 Non-cash consideration
Accounted for at fair value (if not reliably determinable, it is
measured indirectly by reference to stand-alone selling price of the
goods or services).
Step 4 – Allocate the transaction price to each performance obligation

The transaction price (Step 3) is allocated to each performance

obligation (Step 2) based on the stand-alone selling price of each
performance obligation.

If the stand-alone selling price(s) are not observable, they are

estimated. Approaches to estimate may include:
(i) Adjusted market assessment approach
(ii) Expected cost plus a margin approach
(iii) Residual approach (restrictive criteria must be me).
Step 4 – Allocate the transaction price to each performance obligation

Allocating a ‘discount’
Discounts are allocated on a proportionate basis, unless there is
observable evidence that the discount relates to one or more specific
performance obligation(s) after meeting all of the following criteria:
• The goods or services (or bundle thereof) in the performance
obligation are regularly sold on a stand-alone basis, and at a
discount
• The discount is substantially the same in amount to the discount
that would be given on a stand-alone basis.
 Step 5 – Recognise revenue as each performance obligation is satisfied

The transaction price allocated to each performance obligation (Step 4)

is recognised as/when the performance obligation is satisfied, either
(i) Over time, or
(ii) At a point in time

Satisfaction occurs when control of the promised good or service is

transferred to the customer:
• Ability to direct the use of the asset
• Ability to obtain substantially all the remaining benefits from the
asset.
Step 5 – Recognise revenue as each performance obligation is satisfied

Factors to consider when assessing transfer of control:

• Entity has present right to payment for the asset
• Entity has physically transferred the asset
• Legal title of the asset
• Risks and rewards of ownership
• Acceptance of the asset by the customer.
Step 5 – Recognise revenue as each performance obligation is satisfied

Criteria for recognising revenue over time

Applies if any of the following three criteria are met:
(a) Customer simultaneously receives and consumes all of the
benefits
(b) The entity’s work creates or enhances an asset controlled by the
customer
(c) The entity’s performance does not create an asset with an
alternative use to the entity, and the entity has an enforceable right
to payment for performance completed to date.
Step 5 – Recognise revenue as each performance obligation is satisfied
Step 5 – Recognise revenue as each performance obligation is satisfied

Revenue that is recognised over time is recognised in a way that

depicts the entity’s performance in transferring control of goods or
services to customers. Methods include:
• Output methods: (e.g. Surveys of performance completed to
date, appraisals of results achieved, milestones reached, units
produced/delivered etc.)
• Input methods: (e.g. Resources consumed, labour hours, costs
incurred, time lapsed, machine hours etc.), excluding costs that
do not represent the seller’s performance.
Step 5 – Recognise revenue as each performance obligation is satisfied

Revenue is recognised at a point in time if the criteria for

recognising revenue over time are not met.

Revenue is recognised at the point in time at which the entity

transfers control of the asset to the customer.
 2015/12 Q4bii Tang
Tang enters into a contract on 1 December 2014 to construct a
printing machine on a customer’s premises for a promised
consideration of $1,500,000 with a bonus of $100,000 if the
machine is completed within 24 months. At the inception of the
contract, Tang correctly accounts for the promised bundle of goods
and services as a single performance obligation in accordance with
IFRS 15.
 2015/12 Q4bii Tang
At the inception of the contract, Tang expects the costs to be
$800,000 and concludes that it is highly probable that a significant
reversal in the amount of cumulative revenue recognised will occur.
Completion of the printing machine is highly susceptible to factors
outside of Tang’s influence, mainly issues with the supply of
components.

At 30 November 2015, Tang has satisfied 65% of its performance

obligation on the basis of costs incurred to date and concludes that
the variable consideration is still constrained.
 2015/12 Q4bii Tang
However, on 4 December 2015, the contract is modified with the
result that the fixed consideration and expected costs increase by
$110,000 and $60,000 respectively. The time allowable for
achieving the bonus is extended by six months with the result that
Tang concludes that it is highly probable that the bonus will be
achieved and that the contract still remains a single performance
obligation. Tang has an accounting year end of 30 November. (6
marks)
 2015/12 Q4bii Tang
Required:
Discuss how the above two contracts should be accounted for under
IFRS 15. (In the case of (b)(i), the discussion should include the
accounting treatment up to 30 November 2016 and in the case of
(b)(ii), the accounting treatment up to 4 December 2015.)
 2015/12 Q4bii Tang
Suggested answer:
At 1 December 2014 - inception of the contract
Transaction price $1,500,000
Expected costs $800,000
Expected profit $700,000
Tang excludes the $100,000 bonus from the transaction price
because it cannot conclude that it is highly probable that a
significant reversal in the amount of cumulative revenue recognised
will not occur. Completion of the printing machine is highly
susceptible to factors outside the entity’s influence.
 2015/12 Q4bii Tang
At 30 November 2015
Revenue ($1,500,000 @65%) $975,000
Costs ($800,000 @65%) $520,000
Gross profit ($700,000 @65%) $455,000
Tang has satisfied 65% of its performance obligation on the basis of
costs incurred to date. Costs incurred to date are therefore $520,000
and Tang reassesses the variable consideration and concludes that
the amount is still constrained.
 2015/12 Q4bii Tang
On 4 December 2015
The total potential consideration after the modification is
$1,710,000 which is $1,610,000 fixed consideration + $100,000
completion bonus. The allowable time for achieving the bonus is
extended by six months with the result that Tang concludes that it is
highly probable that including the bonus in the transaction price
will not result in a significant reversal. Therefore, the bonus of
$100,000 can be included in the transaction price.
 2015/12 Q4bii Tang
Tang also concludes that the contract remains a single performance
obligation. Thus, Tang accounts for the contract modification as if it
were part of the original contract. Therefore, Tang updates its
estimates of costs and revenue as follows:

POC = $520,000 actual costs / $860,000 total costs = 60.5%

Additional revenue = 60·5% * $1,710,000 – $975,000 = $59,550
As the contract amendment took place after the year end, the
additional revenue would not be treated as an adjusting event.
Thank You
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